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UNIT VI
DIVIDENDS
STOCK EXCHANGE
DEPOSITORIES
DEMATERIALISATION OF SECURITIES
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DIVIDEND
Dividend means the share of the companys
profits distributed among the members
PROFITS VS DIVISIBLE PROFITS
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DIVIDEND
SOURCES OUT OF WHICH DIVIDEND CAN BE PAID:
CURRENT PROFITS
PAST RESERVES CREATED OUT OF PROFITS
OUT OF MONEY PROVIDED BY GOVERNMENT
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DIVIDEND
CURRENT PROFITS
Dividends may be declared out of the profits of the
company for the current year after providing for
depreciation
Else Central Govt. approval is required
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DIVIDEND
Compulsory transfer of profits to reserves:
A company must transfer a prescribed percentage of its
profits (usually not exceeding 10%) to its reserves
before declaring dividends
Where the dividend proposed exceeds 10% but not
12.5% of the paid up capital, the amount to be
transferred to the reserves shall not be less than 2.5%of the current profits
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DIVIDEND
Compulsory transfer of profits to reserves:
Where the dividend proposed exceeds 12.5% but not
15% of the paid up capital, the amount to be transferred
to the reserves shall not be less than 5% of the current
profits
Where the dividend proposed exceeds 15% but not 20%
of the paid up capital, the amount to be transferred to thereserves shall not be less than 7.5% of the current profits
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DIVIDEND
Compulsory transfer of profits to reserves:
Where the dividend proposed exceeds 20% of the paid
up capital, the amount to be transferred to the reserves
shall not be less than 10% of the current profits
No transfer to reserve is required if the rate of dividend
proposed is 10% or less.
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DIVIDEND
Out of past reserves :
Dividends may be declared out of the profits of the
company for any previous financial year or years arrived
at after providing for depreciation.
Else Central govt. approval is needed
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DIVIDEND
The rules framed by the Central Govt provides that in the
event of inadequacy of profits in any year, dividend may
be declared by the company out of past reserves if
following conditions are satisfied :
The rate of dividend declared does not exceed the
average of the rates at which dividend was declared by
it in the 5 yrs immediately preceding that year or 10%
of its paid up capital, whichever is less
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DIVIDEND
The rules framed by the Central Govt provides that in theevent of inadequacy of profits in any year, dividend may be declared by the company out of past reserves if
following conditions are satisfied :
The total amount to be drawn from the accumulated profitsearned in the previous years & t/f to the reserves does notexceed an amount equal to 1/10th of the sum of its paid upcapital & free reserves and the amount so drawn must first
be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equityshares is declared
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DIVIDEND
The rules framed by the Central Govt provides that in the
event of inadequacy of profits in any year, dividend may
be declared by the company out of past reserves if
following conditions are satisfied :
The balance of reserves after such withdrawal does not
fall below 15% of its paid up share capital
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DIVIDEND
Monies provided by the Govt.:
A company can also declare dividends out of the
monies provided by the Central Govt. or a State Govt.
for payment of such dividend in pursuance of a
guarantee given by that Govt.
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DECLARATION OF DIVIDEND ON
PREFERENCE SHARES
Preference shareholders get :
Fixed amount as dividend
Expressed as a percentage of nominal value or paid up
value of shares
Cumulative preference dividend
Non cumulative preference dividend
Participation in residual profits
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DECLARATION OF DIVIDEND ON
EQUITY SHARES
Equity shareholders get dividend :
Only after preference shareholders are paid off
Generally enjoys the privilege of higher dividends
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DECLARATION OF DIVIDEND
Articles commonly contain provisions on the
declaration of dividends
Usual practice is to leave it to the GM to sanction
or declare the final dividend
If a company could not declare dividend at an
AGM then it may do so at subsequent EGM (if
Articles provide) There can be no declaration of dividend for past
years, in respect of which accounts have already
been closed at previously held AGM
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NO DIVIDEND ON NON COMPLIANCE WITH
SEC. 80 - A
Dividends cannot be declared by a company on its
equity shares, if it fails to redeem the preference
shares
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DIVIDEND WARRANT
Any dividend payable in cash may be paid by cheque
or warrant and it shall be deemed to have been paid
when a cheque or warrant is posted to the registered
address of the shareholder
Dividend warrant is an order by the company to its
banker to pay the amount specified therein to the
shareholder whose name is written therein
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MODE OF PAYMENT
Any dividend payable in cash may be paid by
cheque or warrant through the post directed to the
registered address of the shareholder
In case of joint shareholders, it may be sent to the
registered address of one of the shareholders firstnamed in the register of members, or to such
person as shareholders may in writing direct
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DIVIDEND PAYABLE TO THE REGISTERED
SHAREHOLDER
No dividend shall be payable by a company in
respect of any shares except to the registered
holder of such shares or to his order or to his
banker
In case of share warrant, payment should be made
to the bearer of the warrant or to his banker
Payment of dividend in case of sale of shares
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SEPARATE BANK ACCOUNT
The amount of dividend shall be deposited in a
separate bank account within 5 days from the date
of such declaration and the same shall be used forpayment of dividend
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DIVIDEND TO BE PAID WITHIN THE
PRESCRIBED TIME
Dividend must be paid within 30 days of its
declaration
Defaulters shall be punished
with simple imprisonment which may extend to 3 yrs
or
a fine of Rs. 1000/- per day during which such default
continues
The company shall also be liable to pay simple
interest @18% during the period for which such
default continues
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DIVIDEND TO BE PAID WITHIN THE
PRESCRIBED TIME
Director will not be held liable in following cases :
Where dividend could not be paid by reason of the operation of
any law
Where the shareholder has given directions to the companyregarding the payment of dividend and those directions cannot
be complied with
Where the dividend has been lawfully adjusted by the company
against any sum due to it from the shareholders
Where failure to pay dividend was not due to any default on the
part of the company
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DECLARED DIVIDEND A STATUTORY DEBT
A dividend becomes a debt from the date on which it is
declared and becomes payable
Shareholders entitled to it can enforce its payment
through court Even a shareholder can file a petition for winding up
the company
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INTERIM DIVIDEND ADDED BY THE
AMENDMENT ACT 2000
An interim dividend is that dividend which is declared
between two annual general meetings
Interim dividend may be declared by BOD provided
the Articles authorise in this behalf No meeting of the shareholders is essential for such a
dividend
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INTERIM DIVIDEND ADDED BY THE
AMENDMENT ACT 2000
The provisions of Sec 205, as amended in 2000,
provide as follows:
The BOD may declare interim dividend and the amount of
dividend including interim dividend shall be deposited in aseparate bank account within 5 days from the date of such
declaration
The amount so deposited above shall be used for payment of
interim dividend
Interim dividend, like final dividend, becomes a legally
enforceable debt against the company from the date it is
declared by the BOD
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UNPAID/UNCLAIMED DIVIDEND
Where a dividend has been declared by a company but
has not been paid to or claimed by any shareholder
within a period of 30 days from the date of declaration,
the company shall, within 7 days from the date ofexpiry of 30 days, transfer the unpaid or unclaimed
dividend to a special account to be called Unpaid
Dividend account of ..company
Dividend which remains unpaid means any dividend
in respect thereof has not been encashed or which has
otherwise not been paid or claimed
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REASONS
Wrong address of shareholders Death of shareholders without any notification
Relatives and heirs may not be aware of deceaseds shareholdings
Beneficiaries may have travelled without leaving a forwarding
address Many shareholders fail to monitor their investments
Minimum deposit requirements by commercial banks has forced
many small shareholders to close their accounts, hence, the high
incidence of return of dividend cheques back to registrars
Many individual small shareholders not satisfied with dividend
amount received, do not bother to claim dividend.
Ignorance of shareholders is generally regarded as one of the major
causes of unclaimed dividends in the country.
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UNPAID & UNCLAIMED DIVIDENDS
The shareholders can claim dividend amount upto 7 years from
the date of transfer of the amount of dividend to a separate bank
account
Interest @12% on amount not transferred
Transfer to Investor Education & Protection Fund (Sec. 205 C)
Any money transferred to the Unpaid dividend Account which
remains unpaid or unclaimed for a period of 7 years from the date of such
transfer shall be transferred by the company to the Transfer to InvestorEducation & Protection Fund
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ESTABLISHMENT OF INVESTOR EDUCATION
& PROTECTION FUND
Sec. 205 C empowers the Central Government to establish a
fund called the Investor Education & Protection Fund
The fund shall be utilised for promotion of Investor
awareness and protection of the investors interest
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ESTABLISHMENT OF INVESTOR EDUCATION
& PROTECTION FUND
The following amount shall be credited to this fund
Amounts in the unpaid dividend accounts of companies
Application money received by company for allotment of
securities & due for refundMatured deposits with companies
Matured debentures with companies
Interest accruing on above items
Grants & donations given to the fund
Interest or other income received out of investments made
from the fund
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DEMATERIALISATION
In India, a demat account, the abbreviation for dematerialised
account, is a type of banking account which dematerializes
paper-based physical stock shares. The dematerialised
account is used to avoid holding physical shares.
The Securities and Exchange Board of India (SEBI)
mandates a demat account for share trading above 500
shares. As of April 2006, it became mandatory that any
person holding a demat account should possess a Permanent
Account Number (PAN).
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DEMATERIALISATION -PROCEDURE
1.Fill demat request form (DRF) (obtained from adepository participant or DP with whom your
depository account is opened.
2.Deface the share certificate(s) you want to
dematerialise by writing across Surrendered for
dematerialisation.
3.Submit the DRF & share certificate(s) to DP. DP
would forward them to the issuer / their R&T Agent .
4.After dematerialisation, your depository account
with your DP, would be credited with the
dematerialised securities.
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DEMATERIALISATION
PROBLEMS ENCOUNTERED BEFORE
Bad delivery due to faulty compliance of paper work.
Delays in settlement.
Loss, mutilation and theft of share certificates.
High cost (courier, stamp duty in case of transfer).
Restricted liquidity.
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DEPOSITORY
A depository is an organisation where the securities of
investors are held in electronic form.
Any person willing to avail of the services of thedepository can do so by entering into an agreement with
the depository through any of its Depository Participants.
A Depository Participant (DP) is described as an agent ofthe depository.
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DEPOSITORY
FEATURES
Multi depository system
Fungibility
Dematerialisation of securities not mandatory
Rematerialisation of securities
Rights of depositories & beneficial owners
Market lot under the depository mode
Depositories to indemnify loss
Securities become freely transferable
No stamp duty
Pledge or hypothecation of securities
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DEMAT PROCESS
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TRADING & SETTLEMENT
Depositories facilitate transfer of securities from oneaccount to another at the instruction of the a/c holder
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DEPOSITORIES BANKS
Holds securities in account Hold funds in account
Transfers securities in account Transfers funds between account
Safekeeping of securities Safekeeping of money
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DEPOSITORIES BANKS
No minimum balance required Minimum balance is required
Interest can be earned only by stock
lending scheme
Entitled for interest
Does not move balances in account
without account holders authorisation
Uses balances in accounts
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BENEFITS
Eliminates bad deliveries
No risk of loss, mutilation or theft of share certificates
No stamp duty for transfer of shares
Reduced paper work.
Shorter settlement cycle
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BENEFITS
Low interest rates on loans granted against pledge ofdematerialized securities by banks
Increase in liquidity of your securities because of faster transfer
and registration of securities in your account
Instant disbursement of bonus and rights into account
Regular account status updates at any point of time
Information of your holdings in equity at a glance.
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STOCK EXCHANGE
A Stock exchange can be understood to mean aplace where securities are bought are sold.
This market is a result of the transferability ofshares.
A stock exchange does not itself involve in thepurchase and sale of securities, rather it facilitatestrading between the buyer and the seller.
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STOCK EXCHANGE
ADVANTAGES OF TRADING
It facilitates buying and selling of securities verysmoothly as a ready market is created.
It encourages investors to invest in securities asreturns are high and instant
Market Capitalization of a Company isdetermined on the basis of the value of thesecurity as determined by the forces of demandand supply
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STOCK EXCHANGE
ADVANTAGES OF TRADING
It is a good mode of acquiring funds for the
company.
It is an indicator of the growth and profitability
of the company.
Provides greater transparency to the investor
regarding the companies
It confers marketability and liquidity to the
securities
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STOCK EXCHANGE
ADVANTAGES OF TRADING
Platform for continuous price information and
price discovery.
Accelerate the growth of the economy
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DEALINGS IN STOCK EXCHANGE
Stock exchange dealings are subject to the rules
and regulations of the Securities Contract
(Regulations )Act, 1956.
Securities Exchange Board of India (SEBI) is
the authority that monitors and regulates the
functions of the Stock exchanges.
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DEALINGS IN STOCK EXCHANGE
In order to trade on stock exchanges the
Company has to be listed on the stock
exchange.
Dealings are always on listed securities done
through the medium of members during fixed
working hours.
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ABOUT THE BOMBAY STOCK
EXCHANGE
It is the first stock exchange in India
established in the year 1875.
In the year 1995, it switched from open out cry
system to screen based system
The Bombay Stock Exchange uses the BSE
Sensex, an index of 30 large, developed BSE
stocks.
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BSE
This index gives a measure of the overall
performance of the Bombay Stock Exchange,
and is closely followed around the world.
The Bombay Stock Exchange is also actively
involved with the development of the retail debt
market.
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NSE
The National Stock Exchange of India is thelargest and most advanced exchange with 1016companies listed and 726 trading members.
Established in the year 1994, its trading wasfully automated, membership was open toeveryone across the country.
The NSE is owned by the group of leading
financial institutions such as Indian Bank orLife Insurance Corporation of India.
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WORKING OF A STOCK EXCHANGE
A person desirous of buying/selling shares inthe market has to first place his order with abroker.
When the buy order of the shares iscommunicated to the broker he routes the orderthrough his system to the exchange.
The order stays in the queue exchange'ssystems and gets executed when the order logson to the system within buy limit that has beenspecified.
The shares purchased will be sent to thepurchaser by the broker either in physical or
demat format.
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WHAT IS ELECTRONIC TRADING?
Electronic trading eliminates the need forphysical trading floors.
Brokers can trade from their offices, using fully
automated screen-based processes. Their workstations are connected to a Stock
Exchange's central computer via satellite usingVery Small Aperture Terminus ( VSATs ).
The orders placed by brokers reach theExchange's central computer and are matchedelectronically.
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BEARS
An investor who believes that a particular
security or market is headed downward.
A market condition in which the prices of
securities are falling or are expected to fall.
When you see a bear what do you do? Tuck in
your arms and play dead! Fighting back can be
extremely dangerous. It is quite difficult for
an investor to make stellar gains during a bear
market.
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BULL
An investor who thinks the market, a specificsecurity or an industry will rise.
Bulls are optimistic investors who are presentlypredicting good things for the market, and areattempting to profit from this upwardmovement.
Bulls are the exact opposite of the market'sbears, who are pessimistic and believe that a particular security, commodity or entity will
suffer a decline in price.
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LISTING
Listing means admission of the securities to
dealings on a recognized stock exchange.
The objectives of listing are mainly to:
provide liquidity to securities;
mobilize savings for economic development;
protect interest of investors by ensuring full
disclosures.
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SEBI ACT, 1992
Capital Issues (Control)Act,1947
As a part of liberalization process this Act wasrepealed and SEBI Act,1992 was enacted for
Protecting the interests of investors in securities
Promoting the development of the securities market &
Regulating the securities market
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CONSTITUTION OF SEBI
The Central Govt. has constituted a Board by the nameof SEBI under Sec 3 of SEBI Act.
Head office is in Mumbai
SEBI consists of the following membersChairman
2 members from amongst the officials of the Ministry
of the Central Govt. dealing with Finance &
Administration of Companies Act,1956
1 member from amongst the officials of RBI
5 other members of whom at least 3 shall be whole
time members to be appointed by the Central Govt.
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CONSTITUTION OF SEBI
The general superintendence, direction and managementof the affairs of SEBI vests in a Board of Members and
Chairman
The Chairman and all other members are from amongst
the persons of ability, integrity and standing who have
shown capacity in dealing with problem relating to
securities market
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FUNCTIONS OF SEBI
Regulating the business in stock exchanges Registering and regulating the work of stock brokers,
sub brokers, bankers to the issue, trustees of trust deeds,
merchant bankers, underwriters etc
Registering and regulating the work of depositories, FIIs,credit rating agencies etc
Registering and regulating the work of venture capital
funds
Prohibiting fraudulent and UTPs relating to securities
market
Promoting investors education and training of
intermediaries of securities markets
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FUNCTIONS OF SEBI
Prohibiting insider trading in securities Regulating take over of companies
Calling for information from, undertaking inspection,
conducting inquiries and audits of stock exchanges,
mutual funds , other persons associated securities market
Calling for information and record from any bank or any
other authority established or constituted by or under any
Central, State or Provincial Act in respect of any
transaction in securities which is under investigation
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REGISTRATION OF INTERMEDIARIES
The intermediaries and persons associated with securitiesmarket shall buy, sell or deal in securities after obtaining
a certificate of registration from SEBI
Stock broker
Sub broker
Banker to an issue
Merchant banker
UnderwriterDepository
DP
Mutual fund etc.
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